The rating agency is right to highlight the impact that the Malaysian central bank, Bank Negara’s decision to stop issuing short dated ringgit denominated sukuk has had on global sukuk issuance.
As S&P points out, the bank issued about $45bn of the $116.4bn total sukuk sales S&P recorded in 2014. This year it hasn’t issued any sukuk, and looks unlikely to. Bank Negara stopped its programme, as it felt its short dated ringgit sukuk were not getting into the hands of the domestic Islamic banks, whose liquidity operations the bonds were designed to help. It has turned to other tools.
But to equate this to stalling global sukuk issuance, which S&P does, is a bit misleading.
In the last five years Bank Negara has sold only ringgit denominated deals in tenors 12 months or less. Meanwhile, yearly issuance of international benchmark sukuk set records in 2012, 2014 and looks set to do so again in 2015.
The reason that overall sukuk issuance is going to take a bit hit because Bank Negara has abandoned domestic currency sukuk, is because the global sukuk market is comparatively small and fragmented. The vast majority of total supply has been in domestic markets, and specifically in Malaysia.
Islamic institutions are rightly still concerned about getting hold of short term Shariah compliant paper.
The International Islamic Liquidity Management Corporation (IILM) regularly issues shorted dated dollar denominated sukuk, and the Islamic Development Bank (IDB) has committed to several large dollar benchmarks each year. But Islamic banks, grappling with the Basel III requirement to hold more liquid assets, are still sorely in need of liquidity management tools.
But this is mostly, although not entirely, unrelated to the massive demand from sukuk funds for international benchmark issuance in hard currencies.
Debt bankers and Islamic finance practitioners are eagerly touting sukuk as an alternative to conventional markets, arguing sukuk offers competitive pricing in size, with investor diversification to boot.
But for sukuk to be a mainstream alternative the international dollar market is what matters, not short term ringgit or any other local currency. It is dollar benchmark volumes that are crucial in making sukuk a global asset class, not overall global sukuk volumes.
And the record run rate so far in 2015 means that internationally sold sukuk volumes are anything but stalling.